A Bunch of People Said Xbox One Sucked. Microsoft Listened.

Funny thing. For a few weeks, it looked like the Internet was going to be the rope Microsoft (MSFT[1]) tied around its own neck.

But thanks to the power of the Internet — specifically, its ability to empower pissed-off consumers — the tech giant backtracked on its contentious decision to use the Internet as a leash for its Xbox One. No more connecting 24 hours a day if you want to play Xbox games, and no more trying to control used-game sales.

Microsoft just used the Web to save itself from itself.

The battle to take the next-generation video game console crown was Microsoft’s to lose. Sony (SNE[2]) jumped the gun with an early PS4 announcement that lacked a console to show off, while Nintendo’s (NTDOY[3]) Wii U has had its flaws plainly laid out in front of it[4]. Microsoft had the time to analyze the chatter around the other two consoles and craft its message when it announced the Xbox One in May[5] … but it dropped the ball.

Gamers took to the web to vent their anger over a number of Xbox One’s perceived flaws — specifically Xbox’s new restrictive used-game policies and the required Internet connection. The outcry from gamers was loud and persistent. Some Xbox fans threatened to switch to Sony’s PS4.

Microsoft had a second chance at E3. It not only failed, but it let Sony go on the offensive at the gaming industry’s most important event, driving home the message that the PS4 has no such restrictions[6].

So it was somewhat unexpected when Microsoft yesterday acknowledged its mistakes, issued a public mea culpa[7] and changed key components of its Xbox One strategy:

“Since unveiling our plans for Xbox One, my team and I have heard directly from many of you, read your comments and listened to your feedback. I would like to take the opportunity today to thank you for your assistance in helping us to reshape the future of Xbox One. So, today I am announcing the following changes to Xbox One and how you can play, share, lend, and resell your games exactly as you do today on Xbox 360.”

We haven’t seen such a quick public turnaround on a key product strategy since Netflix (NFLX[8]) abandoned plans to split its DVD rental business from its streaming service[9] into a separate entity called Qwikster.

It turns out that intense and sustained public backlash to a decision can cause a company to back down, though. Like Microsoft, Netflix staunchly defended its plans, but after weeks of criticism from customers, it retreated.

Presumably the Xbox One development team is now frantically rejigging functionality and agreements with game publishers that were based on the originally announced functionality. In fact, this potentially could impact Microsoft’s expected November release date.

Still, with game DRM and required Internet connection eliminated, the playing field between the PS4 and Xbox One seems to have been leveled a bit. Here are some of the remaining differences:

The PS4 still retains its $100 price advantage, although the Xbox One does include the Kinect (Sony’s PlayStation Eye equivalent is an extra-cost option).

In terms of horsepower, Sony has a slight edge through use of faster RAM, but the Xbox One has the ability to offload graphics processing to the cloud.

The Xbox One’s controllers gain vibration feedback in the triggers, but the PS4’s get a touchpad, Share button for posting screenshots on Facebook (FB[10]) and a speaker.

If you’re into video and TV, both consoles have 4K support and Blu-ray drives, but Microsoft has a definite edge with its TV integration.

Where the PS4 allows use of Sony’s PlayStation Vita handheld console as a companion display, Microsoft has its SmartGlass[11] support for tablets and smartphones.

Microsoft’s Xbox Live remains the standard for online gaming, but users have to pay for it.

In short, it’s too close to call … which for Microsoft should be exciting news. How has its stock — and its competitors’ shares — reacted?

Nintendo, Sony and Microsoft all are in the red today, but don’t look too much into it. They’re merely following what’s been a poor 24 hours for the broader stock markets, U.S. and abroad, powered by much bigger forces than video games.

No, the big winner right now has actually been GameStop (GME[12]) — the retailer has built much of its business on buying and selling used video games. Its stock dropped more than 13% after Microsoft announced plans to manage used-game sales[13] with a scheme that involved approved retailers only and the ability for game publishers to charge fees as part of a trade, or restrict their titles from trade/resale altogether. Today, it has recovered by more than 6%.

Bottom Line

Come November, the battle for the next-gen console crown should be much closer than it was shaping up to be even a week ago.

With few key technical advantages between consoles and Microsoft’s used-game and Internet liabilities eliminated, it’s likely to come down to the same factors that have been at play for the past nine years: platform loyalty and the games.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.